Assessing the Probability of Bankruptcy

Assessing the Probability of Bankruptcy
Hillegeist, Stephen; Keating, Elizabeth; Cram, Donald; Lundstedt, Kyle
2004-10-18 00:00:00
We assess whether two popular accounting-based measures, Altman’s (1968) Z-Score and Ohlson’s (1980) O-Score, effectively summarize publicly-available information about the probability of bankruptcy. We compare the relative information content of these Scores to a market-based measure of the probability of bankruptcy that we develop based on the Black–Scholes–Merton option-pricing model, BSM-Prob. Our tests show that BSM-Prob provides significantly more information than either of the two accounting-based measures. This finding is robust to various modifications of Z-Score and O-Score, including updating the coefficients, making industry adjustments, and decomposing them into their lagged levels and changes. We recommend that researchers use BSM-Prob instead of Z-Score and O-Score in their studies and provide the SAS code to calculate BSM-Prob.
http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.pngReview of Accounting StudiesSpringer Journalshttp://www.deepdyve.com/lp/springer-journals/assessing-the-probability-of-bankruptcy-7GR0zxstBR